China Hints at Currency Appreciation as US Delays Key Report

14 April 2010

New twists have emerged in the strained debate between Beijing and Washington over whether China's government is intentionally keeping its currency low in order to boost exports by making them artificially cheap.

Top Chinese policymakers have in recent weeks dropped hints that some appreciation might be in the offing for the renminbi, which China has maintained at a fixed level against the dollar since mid-2008. But they have stressed that Beijing will move on the issue at its own pace. And they have also used the revelation that China ran a trade deficit in March - the first after six years of surpluses - to suggest that the exchange rate is not the major problem that Washington claims it is.

Meanwhile, the Obama administration has eased some of the pressure it was exerting on Beijing to let its currency rise, possibly for fear that US comments were having the opposite of the desired effect.

Early this month, US Treasury Secretary Timothy Geithner delayed the scheduled 15 April release to Congress on international exchange rate policies. Although the stated reason was to defer to upcoming high-level meetings involving Chinese and US officials, the decision allowed him to duck the contentious issue of whether to accuse China of ‘manipulating' its currency.

Manipulation is a loaded term in currency discussions. Many Congressional lawmakers blame the Chinese exchange rate for job losses in the US. Some who are already seeking to slap Chinese imports with extra duties to compensate for the alleged undervaluation had wanted the Treasury Department report to use the word. (Recent Treasury reports had not done so, though they were critical of China's exchange rate regime.) Branding China a currency manipulator, on the other hand, would have incensed Beijing.

Observers of bilateral economic relations said that postponing the report would relieve the rising tensions between China and the US, and actually facilitate flexibility from a Beijing determined not to be seen as yielding to foreign pressure. "The guillotine has been removed from the scene," Nicholas Lardy, a China expert at the Washington-based Peterson Institute for International Economics, told the Associated Press. "Now, they will feel more comfortable in moving."

Soon afterwards, Geithner made a surprise visit to China, where he met with Vice Premier Wang Qishan. During the treasury secretary's trip, speculation grew that China would allow the renminbi to appreciate modestly, with numerous press reports citing economists, analysts, and always anonymous government officials to suggest that an announcement was imminent.

On Saturday, however, data issued by China's customs agency revealed that the country ran a trade deficit of US$7.24 billion in March, compared to a surplus of US$7.61 billion in February. Surpluses against the US and China were more than offset by deficits with Japan, Taiwan, and Korea. China's trade surplus for the first quarter of 2010 was $14.49 billion, down some 77 percent from a year earlier.

Economists said that the March deficit was probably temporary, attributable to the dip in production and exports during the weeklong lunar new year holiday in February. Nevertheless, the commerce ministry in Beijing used it to argue that the value of the renminbi was not responsible for China's large trade surplus with the US, an issue that has become politically explosive as unemployment remains high in the United States.

"China's trade surplus continued to fall and China even posted a trade deficit in March under a basically stable renminbi exchange rate," said ministry spokesperson Yao Jian, reports Xinhua. "This proved again that in an era of economic globalisation, it is market supply and demand, and other factors that decide trade balance."

Chinese President Hu Jintao struck a less combative note while in Washington this week to attend a nuclear security summit. In response to US President Barack Obama's call for China to move toward a "more market-oriented exchange rate," Hu refrained from defending the current value of the renminbi, saying only that Chinese policy would be "based on its own economic and social-development needs."

According to an analysis in the New York Times, the Chinese government's liberty to act on the currency is being limited by nationalist public opinion that views the value of the currency as a matter of national sovereignty. The Chinese blogosphere is ablaze with discussions of the issue, with some suggesting that the US is seeking revaluation to undermine China's economic progress.

The US is not the only country affected by China's currency policy. Arvind Subramanian, a senior fellow at the Peterson Institute and the Center for Global Development, has argued that Chinese undervaluation hurts other developing countries, which compete to produce similar products, more than it does the US or the EU.

Hu will likely face questions about the renminbi in Brazil, his destination following the US. Henrique Meirelles, the president of Brazil's central bank, recently said that the weakness of China's currency, creates "severe distortions in the world economy" and problems for some industrial sectors, although Brazil was affected less than most. "We have expressed our opinion that all the currencies should float, and the Chinese currency should float as well," he told Bloomberg in an interview, predicting a rise in the renminbi in the upcoming year.

Currency is on the agenda of a 15-16 April summit of so-called BRIC (Brazil, Russia, India, China) leaders in Brasilia. However, it will be in the context of a discussion on diversifying the currencies used in trade, and reducing dependence on the dollar.

ICTSD reporting. “Geithner China visit likely to spur currency shift,” ASSOCIATED PRESS, 9 April 2010; “Geithner visit China as currency plan appears to take shape,” WASHINGTON POST, 9 April 2010; “China Says Trade Data Justify Its Yuan Policy,” WALL STREET JOURNAL, 11 April 2010; “China's March deficit shows currency not cause of trade imbalance: spokesman,” XINHUA, 10 April 2010; “Hu Says China Follows Own Path on Yuan as Obama Seeks Revalue,” BLOOMBERG, 13 April 2010; “Spotlight Complicates China Steps on Currency,” NEW YORK TIMES, 13 April 2010; “Yuan to Rise ‘a Bit More,’ Brazil’s Meirelles Says,” BLOOMBERG, 14 April 2010; “BRIC Leaders to Discuss Currencies for Trade at Brasilia Summit,” BLOOMBERG, 9 April 2010.

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